Buying Foreclosed Homes....

It’s been said that one person’s misfortune is another person’s fortune, and that is certainly the case in the real estate business.  When you purchase a foreclosed home, you are benefiting by cashing in on a home that someone else was unable to pay for.  They are a bit more difficult to execute than traditional home sales, but the potential to turn them (or “flip them”) for a nice profit may be very attractive.

Foreclosures occur when the homeowner is unable to make the payments.  Banks do not like having to foreclose, because they stand to lose a considerable amount of money.  The upside for the consumer is that banks will often sell these homes for as much as 30% discount in order to recoup at least some of their loss.  Last year, the national average when buying a foreclosure home was 25% below the full market value.

It is fairly easy to locate foreclosed homes, as the sign out front will say something along the lines of Deposit Required, Bank Owned, or Corporate Owned.  You can also peruse the classified section in your local paper, since sheriff listings or auctions will be listed there.  Sheriff auction may be the least expensive way to purchase a foreclosed home.

Although not exactly foreclosures, short sales may be an attractive option.  Short sales are designed to move houses quickly in order to avoid foreclosure.

It is wise to locate an agent who is experienced in foreclosures.  Many sellers will refuse to entertain offers from buyers who are unrepresented.   You need to move fast if you find a promising foreclosed property because there is a very good chance it will not be there the next day. 

You’ll need to inspect the property.  Some sheriff’s auctions, while attractively priced, only allow for sight unseen purchase, and for good reason.  It has been my experience that most people who fall behind on payments are decidedly less obsessive about maintaining the maintenance or general appearance.  Some foreclosures almost qualify as “fixer uppers”.  Keeping this in mind, you might want to mentally add 10% to your offer to maintain an idea of what you will end up spending on the home.

Consider how long the house has been empty.  Typically, the longer the house has been unoccupied, the more damage you will have to deal with.  Check out the landscaping; if a house has been neglected, trees, vines, and bushes can contribute to the deterioration of the structure.  There may also be damage as the result of vandalism or even damage caused by the previous owners.

See if the foreclosed home has any liens on it, such as unpaid taxes, homeowners association dues, etc. and find out who is responsible for those costs.

Make sure to check out the surrounding neighborhood as well.  Buying a home and spending considerable amounts of money fixing it up will do little good if the area is marked by numerous foreclosures or a high crime rate.  Drive through at various hours of the day and night and see what opinion you end up forming.

Think long term.  Many foreclosed homes may decline in value over the coming months, so you have to approach the transaction from a long term perspective.   Foreclosures are not ideal properties for “quick flips” as they will usually require a long term investment of time as well as money.  Make your goal a fully amortized, fixed rate mortgage.

Assuming your credit is good, get prequalified for a mortgage, locate the listing broker, and make your offer.    

Have the home inspected if the seller allows.  Personally, if the seller opposes an inspection, withdraw your offer and look elsewhere.  A reputable seller should have nothing to hide.

Be aggressive in negotiating with a bank…..remember, the home is just sitting there and doing nothing for them.  They are motivated to move the property.  Don’t go overboard, but don’t be afraid to push a little, either.

As with any government operation, you’re going to end up dealing with a lot more paperwork than you would for a normal real estate transaction.  Be prepared to give it the time required.

If you are patient, and play every card right, there is no reason that you cannot get into a nice home for an attractive price.  Knowing all the possible issues going in will go a long way towards making the process more palatable for all involved.